Crude futures fell for a third straight session Monday as a strengthening dollar erased much of oil's gains from a rally last week.

Light, sweet crude for December delivery settled down $1.82, or 2.3%, at $78.68 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange settled down $1.66, or 2.1%, at $77.26 a barrel.

Investors pulled out of oil and poured back into the dollar, reversing course after a sinking U.S. currency had propelled crude futures to a one-year high above $80 a barrel last week. The dollar gathered strength throughout the day, trading recently at $1.4852 to the euro after hitting a 14-month low of $1.5064 early Monday.

A selloff in financial sector shares appeared to set off the rush out of oil and other commodities, as confidence in major banks was shaken by a Wall Street Journal report that Bank of America Corp. (BAC) could find it difficult to repay federal bailout funds.

"Everybody knows there's more bad loans on the books, so when you have that type of stuff come out, it drives markets lower; and as markets move lower, you see people going back into dollars," said Matt Zeman, president of trading at LaSalle Futures Group in Chicago.

Whether Monday's drop back below $80 a barrel marks the end of a three-week rally likely depends on the dollar's next move against the euro.

"The crude market has been obsessed with the course of the U.S. equity markets and the course of the U.S. dollar, and I think that remains the case today," said Tim Evans, an analyst with Citi Futures Perspective.

Oil prices are likely to see little support in the short term from the state of global supply or demand.

In the U.S., the world's biggest oil consumer, refiners are holding down production of gasoline and distillate, including heating oil and diesel, in an attempt to reduce surplus stockpiles of both types of fuel.

U.S. oil inventories are seen climbing another 1.4 million barrels for last week, according to a Dow Jones Newswires survey of analysts, while gasoline stocks are expected to fall 1.2 million barrels and distillate inventories are seen dropping 500,000 barrels. Refiners are seen raising output by 0.2 percentage point to 81.3% of capacity.

Over the weekend, Nigeria's main rebel group announced it would stop targeting the country's crude oil pipelines to clear the way for high-level negotiations with the government. Militant attacks have cut production by about 600,000 barrels a day over the last three years, but an oversupplied global market isn't clamoring for more Nigerian crude.

"It means more supplies may be coming on line when there is too much supply already," said Tim Jennings, president of Vantage Trading in New York.

Front-month November reformulated gasoline blendstock, or RBOB, settled 1 cent, or 0.5%, lower at $2.0338 a gallon. November heating oil settled 4.21 cents, or 2%, lower at $2.0335 a gallon.


More information on settlements and highs and lows for futures on Nymex and ICE platforms can be found by searching for the following headlines:


Nymex Light Crude Oil Close
Nymex Harbor RBOB Gasoline Close
Nymex Heating Oil Close
ICE Brent Crude Oil Close
ICE Gas Oil Close

-By Edward Welsch, Dow Jones Newswires; 613-237-0669; edward.welsch@dowjones.com